Tax Rewards for Innovation
By Ann Minson, Tax Director, Ensors Chartered Accountants
It’s hard to believe that it is nearly 20 years since the first research and development tax relief was introduced, with the motive of driving economic growth through innovation.
Since then successive governments have continued to strengthen the tax system for innovative UK companies and there are now three main tax reliefs that any company involved in R&D needs to know about.
1. R&D tax relief for SMEs: The original relief is still the most generous, providing companies with a 230 percent tax deduction for eligible R&D expenditure. That equates to 43.7p tax saved for each £1 spent or, for loss making companies, a 33.35 percent cash credit. Not surprisingly, this is the most popular of the incentives, with the number and value of claims continuing to increase every year.
HMRC continues to encourage claims, including through an advance clearance mechanism for smaller new applicants. However, in reaction to perceived abuse of the cash credit, the cap by reference to employment taxes paid is to be reintroduced from April 2020. This could have significant implications for companies operating through contractors rather than employees.
2. R&D Expenditure Credit (RDEC): RDEC is available to companies that cannot claim the SME relief. That includes large companies, as well as SMEs acting as subcontractors for certain customers or whose R&D is funded. RDEC provides a taxable 12 percent tax credit on eligible expenditure, which can be offset against corporation tax or surrendered for a cash credit equal to 9.72 percent of the eligible costs.
3. Patent Box: Patent box rewards companies holding intellectual property (IP) in the UK, by providing an effective 10 percent tax rate on profits generated by qualifying patents. Its requirements have been tightened up in recent years, so that it is now most beneficial for companies that develop their own technology, rather than buying it or developing it in other group companies. That said, for companies whose internal R&D leads to patented IP it can still be a valuable relief.
The main reason for missing out on these reliefs is a misapprehension that they are restricted to companies working in obvious hi-tech fields. Of course, the bulk of claims are in these areas, but successful claims can also be made in fields as diverse as manufacturing, agronomy, food or beverages, retail, consultancy and many others.
Whatever stage your company is at in its innovation life-cycle, these tax reliefs really should be on the agenda, and Ensors can provide you with the professional assistance you need to make successful claims.
Ann MInson is a Tax Director in Ensors Corporate Tax Team. T: 01473 220096 E: firstname.lastname@example.org or visit ensors.co.uk